NYAPRS Note: The Human Services Council released its very thoughtful and well researched assessment of the critical role nonprofits play and the mounting challenges they face, especially in the current environment. The report is packed with insight and analysis: please review it carefully. Here’s one particular recommendation it makes that is of critical importance to behavioral health providers.

Recommendation # 2: Ensure that the State’s restructuring of Medicaid is a win for beneficiaries, taxpayers, and human services providers.

In April 2015, the New York State Department of Health (DOH) began a fundamental restructuring of Medicaid intended to improve client care and contain costs. The new approach aims to reduce hospitalizations by 25 percent by revamping the delivery system, and transitioning reimbursement to value-based payments. Primary care will be integrated with behavioral services, including mental health and substance abuse services, and the evolution of the current, largely fee-for-service system to a fully managed care model will be accelerated.

The State recognizes that human services providers can be particularly effective in delivering the broad range of preventive interventions that will help New Yorkers become healthier. However, the program’s delivery and payment arrangements make their participation an enormously risky proposition. Major financial investments in information technology for appropriate medical recordkeeping and outcomes tracking, staff training, and new accounting and cash flow management systems, among others, are required. These investments will be recouped only if large health care systems designated as “gatekeepers” by the Health Department make referrals to them and if providers are able to establish that their interventions actually improve expected health outcomes. Those are two big ifs.

Providers are also vulnerable because little or no outcome data are currently available for them to plan their programs, and projected revenue can be impacted by a host of other unknowns, including potential reimbursement amounts, measures of health outcomes, claims processing timeframes, and disallowances—not to mention the added complexity in billing multiple insurance companies, each with its own eligibility rules and processes.

The State and federal government provided more than $7 billion to major health systems in New York State, which will help buffer the financial costs and risks of Medicaid restructuring, but there is no assurance funds will flow downstream to human services providers.

For human services providers to participate successfully, the State must help pay for necessary investments in information technology, capacity building and training, metrics tracking, and accounting systems, and cushion the impact of delays in claims processing on cash flow and the impact of pay-for-outcome financing.

The collapse of the Federation Employment & Guidance Service a year ago sent shock waves through the New York nonprofit world, with executives wondering who might be next.

FEGS, the largest human service provider in New York, was thought to be too big to fail and its bankruptcy, officially declared last March, highlighted how precarious the entire sector had become.

While some wrote FEGS off as an anomaly, others decried poor management. Still others derided a nonsensicalbusiness planthat saw the nonprofit stretch itself too thin.

But all of that must be seen against the backdrop of a crumbling industry that won’t survive without fundamental changes in reimbursement models and regulatory burdens, according to an exhaustivereportfrom the Human Services Council, which concluded FEGS was not an acute problem but symptomatic of a chronic concern and "a sector facing a crisis."

The report laid out three major problems with the industry and made eight recommendations, including reducing regulations, increasing reimbursement and warning providers to be more responsible and avoid contracts with the city or state that do not pay the full cost of services.

“We cannot continue to take on endless government contracts that do not pay the real costs of service, nor should we,” the report said. “If contracts and grants do not pay adequate rates or involve significant hurdles such as unfunded mandates or unjustified metrics, the programs cannot be as effective as they could be, and for too long nonprofits have filled the gap. Now, the gap is too large.

Providers have to say no, not only to shed light on funding issues, but because these chronic issues eat away at the fabric of the human services delivery system.”

The human services sector works with 2.5 million New Yorkers, offering programs such as Meals on Wheels, pre-kindergarten, behavioral health services and job training.

The city has 5,100 contracts worth $4.3 billion and the state has an additional 2,000 contracts worth about $1.5 billion.

At its core, the sector is facing a budgetary problem. Revenues, most of which come from government contracts, do not meet expenses. The contracts pay roughly 80 cents on the dollar of the program’s costs, according to the report.

As a result, every new client served is another dollar lost, an ultimately untenable business model that forces agencies to rely more heavily on private donations.

The Jewish Board of Family & Children's Services, for example, runs an $18 million program deficit, which is made up for with $13 million in fundraising and an endowment that provides an additional $5 million, CEO David Rivel said.

The Jewish Board took on $75 million worth of FEGS contracts after its collapse, a move likely to grow the deficit by $1 million or $2 million in the short term.

The lesson from FEGS, Rivel said, is that no organization is too big to fail, and that everyone is operating with little or no margin for error.

”It could happen to anyone,” he said. “You can’t make a mistake or you’re out of business.”

That was underscored in the report, which found 18 percent of providers were insolvent in 2013, meaning their liabilities exceed their assets. The budgets of half of New York City human services providers are either in the red or just breaking even with little or no cash reserves, according to the report.

Three-quarters of providers reported either no line of credit or that their credit line was worth less than one month’s expenses.

“What the data suggest is there are a large number of organizations that are very fragile,” said John Macintosh, a partner at SeaChange, a merchant bank for nonprofits.

That forces agencies to cut corners on infrastructure, which can be particularly troubling for those that provide housing services.

City Comptroller Scott Stringermade headlineswhen he refused to register dozens of contracts with providers, saying he would not “put families in rat-infested fire hazards that don’t meet the standards.”

Another problem is that governments do not want to pay indirect costs, or overhead, which means they aren’t paying for an IT department that might make the program’s more efficient, or a finance department that might help be better stewards of public dollars. Donors don’t typically get excited to fund the accounting department, either.

But those areas are crucial to running an organization.

When payments are made, they are often made late. More than one-third of city contract payments and one-fourth of state grant payments were received more than 90-days late.

Yet another challenge, according to the report, is the move to managed care and value-based contracting.

The state and federal governments are investing more than $7 billion to try and reduce avoidable hospitalizations but it isn’t clear how much of that money will trickle down to social service providers, who argue their programs are a cost-effective way to achieve the state’s goals.

“These investments will be recouped only if large health care systems designated as ‘gatekeepers’ by the Health Department make referrals to them and if providers are able to establish that their interventions actually improve expected health outcomes,” the report said. “Those are two big ifs.”

Rivel said it was incumbent upon the industry to demonstrate that “money spent with us is money well spent.”

Casting a shadow over this whole report is Gov. Andrew Cuomo’s push for a $15 minimum wage.

The sector is largely supportive — Rivel said his dream is to pay Wall Street executives $15 per hour and have his employees take home million-dollar bonuses — but the governor has made no move to increase funding for those that rely on government contracts.

That will only exacerbate the problem, said Allison Sesso, executive director of the Human Services Council, an agency that works with government on behalf of other nonprofits.

“Government needs to be responsible,” she said.

Sesso, however, called on her peers to be realistic about what to expect from government.

“I have no fantasy that the government, overnight, is going to put more dollars into human services,” she said.

Instead, she wants government to consult with the sector before creating a project’s goals and setting a price.

If that can’t be done, providers must learn to say “no” even when they sincerely desire to help the needy, according to the report.

To that end, Sesso is calling for a ranking system to measure government projects and assess their risk. The rankings report would outline financial risks and programmatic issues.

“This information would enable providers and boards to make informed determinations as to whether a program is in the best interests of the organization and its clients, or represent a potential liability,” the report said.

When FEGS declared bankruptcy and it became obvious its books and business were deteriorating for years before the final demise, many wondered how its board could have been so oblivious.

It is a question that may never fully be reconciled but it did serve as a wake-up call to other agencies that assumed they were safe either because of their size, their competence or both.

“It is clear that is not the case,” Sesso said. “Size doesn’t matter, it’s margins that matter. … Margins are thinning and that’s how you end up with this problem.”